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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Chuzzlewit who wrote (71036)	11/27/1999 4:44:00 PM
From: Freedom Fighter	Read Replies (2) \| Respond to of 132070

CTC, I essentially agree with you on all the valuation points. Time will tell if they can expand their model. I'm a little less optimistic about the PC remaining a strong and profitable grower though. Essentially it is a commodity product as it exists. This works against it. I also see the move towards networking and the internet as slowly undermining the need for an intelligent terminal with its own extensive operating system and software. Dell may assemble and distribute the eventual replacement, but that isn't carved in stone. I also don't know what to make of the put selling. My guess is that over the long haul they will eventually be "put" stock at a price much higher than the market price and the whole thing will be an economic wash (give or take). Wayne

To: Chuzzlewit who wrote (71036)	11/28/1999 10:28:00 PM
From: Don Lloyd	Read Replies (1) \| Respond to of 132070

CTC - [[...The real problem, though, is not the share buy-back (which is really a tax-advantaged DRIP), but the issuance of employee stock options with dilution to shareholders. The way I view them, options are real expenses that the company manages to shift to investors, so they don't appear on the income statement. On the flip side, the company also realized a lot of unreported "earnings" through the sale of put options. These transactions are enormously complicated, and I have no idea how to unwind them. Two things should be clear. Dell's earnings overstate economic profit to the extent of the value of the options issued, and Dell's earnings are understated to the extent that they realize economic profit from the sale of put options. I once spent an entire weekend trying to unwind this stuff, but unfortunately, SEC and GAAP accounting rules do not require explicit disclosure of the information required to back these effects out.]] The REAL problem is that trying to shoehorn economic reality into an arbitrary accounting structure that tries to be all things to all people simultaneously results in a total mishmash that gives distortions of all flavors. If a company XYZ pays $1B for its factor inputs and generates $2B in revenues, it has a profit of $1B, whether it is private or public, whether it has 1 shareholder or 6 billion, or whether the total number of shares is 1 or 1 per atom in the universe. Profits and ownership should be treated as orthogonal. Option grants are primarily a re-structuring of company ownership, not an expense. Over the long term, you can easily imagine undifferentiable results from a series of option grants vs a pattern of secondary offerings. In both cases, you have a dilution of ownership and a positive, lumpy cash stream to the company. A true economic cost of an action must be the best alternative that is precluded by the action, not some imagined price for something that is not determined by a real market. The ability of a company to substitute options for a portion of salary only exists because employees, for their own subjective reasons, prefer the options to the amount of cash salary foregone. This is certainly not true for all companies, and must be considered as a natural advantage, much like a mill located on a stream as compared to a mill with electrical drive requirements for motors. Imagined expenses are simply distortions. The other part of the problem is that every company that earns a profit is also inherently an investment and money management company. It is clearly a fact that many companies believe, and probably correctly, that trying to maximize their returns on the accumulated profits would reduce their market value by hurting the transparency of the financial operations of the company as a whole. Buybacks, puts, and external equity and income investments all should be dealt with as investments made by the company as an alternative to allowing shareholders to receive and invest dividends on their own. It is neither inherently good nor bad, but needs to be clearly judged on actual results, rather than intermixed with both business results and company ownership. No essential difference exists between a company buying back its own stock and buying shares of another company. In either case, shareholder funds are invested, and are unavailable for alternative uses. To summarize, trying to combine incommeasurate business results, investment results and ownership considerations into a single number is both futile and counterproductive. I seriously doubt that Warren Buffet begins and ends his analyses with EPS. If investing were this easy, any excess returns would be eliminated in any case by a combination of arbitrage and time discounting. Regards, Don